Saturday, August 04, 2012

I rarely get into the nuts and bolts of any particular area of law on this blog, in part, because I lack the formal training. Now and then, however, I may let my avocational interests and amateur‘s enthusiasm get the better of me and throw caution to the wind. One such occasion occurred recently at Concurring Opinions, with a blog post by Dave Hoffman: “Nominal Consideration at the Olympics.” I confess to a longstanding curiosity about the role of promises in contract law, and this struck me as a fortuitous opportunity to explore some intuitions and thoughts I’ve pretty much kept to myself. I’ve copied below (with some slight editing, including corrections) the original post and the comment thread. I thought perhaps some Ratio Juris readers might find it of interest, particularly those with some familiarity with contract law. While parts get fairly technical, there are some precious snippets of humor that should stave off any tedium. I felt some measure of vindication for my inchoate intuitions and tentative thoughts in the brilliant concluding comments by one JM Sanderson.

“London Olympic organizers tell the Associated Press that the former Beatle [Paul McCartney] and other famous acts who participated basically “donated their time — receiving a mere pound ($1.57) — for their performances.” And that nominal fee was offered to make the Olympics contracts binding.”

If true, I take it that British law takes the position that nominal consideration can bind obligees, but that “false” nominal consideration can’t. Thus, the organizers had to both promise to pay McCartney a pound and actually pay it before the ex-Beatle was bound to perform.

To my mind, this is the least good resolution of the consideration problem possible. Look: either consideration should mean something – bargained for exchange motivating actual counter-promising – or parties should be free to dispose of the requirement of consideration entirely. In the United States, only Pennsylvania has taken that sensible latter position. The rest generally tend to require actual bargained for exchange, excepting only charitable subscriptions, which the Olympics are not. The Brits, who handed us this mess in the first instance, have apparently now embraced the unfortunate, mumbo-jumbo, hybrid, which reduces the sensible formality of consideration to a bit of a magical contract theatre. Does anyone think that that pound of consideration actually motivated McCartney’s promise to perform?

Comment Thread:

(1) JM Sanderson (July 30, 2012)

Having studied English contract law, I can confirm that English law is now essentially in the position where nominal consideration is just a formal requirement – essentially evidence proof of intention to create legal relations. And, unlike some US jurisdictions, there is no rule I know of that requires the consideration to be paid before the contract is binding even if nominal. A fully executory contract for a penny consideration is binding. The case of Chappel v. Nestlé found that three snack wrappers were good consideration, and the courts resolutely refuse to look at the value of the consideration.

It’s also worth remembering that England retains the doctrine that contracts by deed require no consideration to be binding, reinforcing the theory that what the law is really looking for is intention to create legal relations. Almost all commercial contracts are executed as deeds to avoid disputes over whether the consideration is good (particularly because the rule in Pinnel’s case and Foakes v. Beer is still good law [with notable exceptions, e.g., practical benefits cf. Williams v. Roffey Bros]).

I would actually say that the English position is quite sensible. The doctrine of consideration and the deed exception are outdated, but as rules of evidence, they avoid disputes about intention (i.e., transaction costs) through two simple rules everyone knows. It is easy to agree a nominal consideration, and it is now easy to make something a deed (see Law Reform [Miscellaneous Provisions] Act 1989 s. 2). Like the special form of words in the Roman Stipulatio, or the medieval mercantile custom of sharing a drink when a deal is concluded, the English rules are just the ways that one demonstrates one intends to be bound. If we didn’t have them, we’d have to look for other ways to prove people meant to be bound.

(2) Patrick S. O'Donnell (July 30, 2012)

In effect this is to make a gratuitous promise binding, the “nominal” consideration performing the prior common law function of the seal, which the doctrine of consideration effectively displaced in contract law. After all “a promise under seal was enforceable without the necessity of legal consideration—something of value—either because the seal was a substitute for consideration or because the existence of consideration was conclusively presumed.” The coordinating conjunction is inclusive in this case so the former proposition indicates how nominal consideration provides the sort of evidence once provided by the seal, hence as elegantly noted above (by someone with far more knowledge of contract law than me), proving mutual intent on the part of the parties to be bound. The principle of “voluntary exchange” (on the terms agreed to by the parties) is given primacy here, as well as what Fuller termed the “formal” elements of consideration (i.e., evidentiary, cautionary, and channeling). As it says in one of my old contract books, “despite what the Restatement says, the better approach [in some instances] may be to take the apparent [i.e., nominal] consideration at face value. This is particularly so when the formal functions of consideration [Fuller above] are fully satisfied by a clear document and there is no suggestion of advantage taking or underhand conduct by the promisee, and no indication that the promisor acted impulsively and with immediate regret.”

(3) JM Sanderson (July 31, 2012)

Patrick – the common law function of the seal still exists in England (well, sort of – nowadays, you don’t actually need to use a seal, just write on the document ‘this is a deed’ and have it signed and witnessed).

(4) Patrick S. O'Donnell (July 31, 2012)

Both the original post and JM Sanderson’s informative comment prompted me to look up something I had long forgot about, namely, P.S. Atiyah’s delightful discussion of consideration: “Consideration: A Restatement,” in his book, Essays on Contract (1986). I recommend his treatment to anyone even remotely interested in this topic: it is simply brilliant (and not just because nothing he says contravenes the above comments!).

(5) Ringo Starr (August 1, 2012)

I would have held out for a peppercorn.

(6) Ken Adams (August 2, 2012)

Far from being “quite sensible,” the notion that nominal consideration can support a contract is bizarre, in that it relies on a sham.

This notion is just another symptom of a peculiarly English disease: reliance on empty formalism and magic words in contract drafting. Consider how English courts have dreamed up distinctions between different “endeavours” provisions that no reasonable English speaker could endorse. And how English practitioners are more inclined than their U.S. counterparts to make a fetish out of the ostensible distinction between “represents” and “warrants.”

How English lawyers and courts treat contract language could be considered an added cost of doing business in England.

Regarding the Olympics contracts, in a rational system one would be able to treat as consideration the honor and exposure that comes with appearing in the opening ceremonies.

(7) Patrick S. O'Donnell (August 2, 2012)

A sham? Oh my. I suspect this reveals a rather impoverished understanding of how “the law” (especially the common law) works.

The words in question are not “magical” but functional, performative, and purposive, and the formalism (the characterization can be misleading, as it is in the case of Lon Fuller’s ‘formalism’) is hardly without substantive and significant meaning (the formalism is in reference to reasons: structural, causal, and otherwise). As Atiyah explains with regard to the “doctrine” of consideration in the English context:

“On the one hand, it is clear that the law has never had a ‘final’ or definitive version. It has, on the contrary, been continually developing up to the present day, and will no doubt go on developing in the future, in so far as it lies in the power of the courts to mould and adapt the law to changing circumstances and moral values. And on the other hand, even though the doctrine of consideration may sometimes seem to work unfairly, it does it injustice to regard the whole doctrine as irrational or purposeless.”

Atiyah enumerates the cluster of legal propositions[1] commonly thought to define the doctrine of consideration, proceeding to demonstrate “that scarcely one of the propositions…accurately represents the law.” He further explains why it is important to appreciate the fact that

“the courts have never set out to create a doctrine of consideration. They have been concerned with the much more practical problem of deciding in the course of litigation whether a particular promise in a particular case should be enforced. Since it is unthinkable that any legal system should enforce all promises, it has always been necessary for the courts to decide which promises they would enforce. When the courts found a sufficient reason for enforcing a promise, they enforced it; and when they found that for one reason or another it was undesirable to enforce a promise, they did not enforce it. It seems highly probable that when the courts first used the word ‘consideration’ they meant no more than that there was a ‘reason’ for the enforcement of a promise. If the consideration was ‘good,’ this mean that the court found sufficient reason for enforcing the promise. All this is not to suggest that the law was ever unprincipled, or that judges ever decided cases according to personal or idiosyncratic views of what promises it was desirable to enforce. As always in the common law, it was a collective view of the judges, based largely on the conditions and moral values of the community, which prevailed over a period of time. The doctrine of precedent,[2] then and now, was always available as an aid to the courts in deciding what promises to enforce.”

Given that the doctrine of consideration on this account entails the presence of a sufficient reason for the enforcement of promises, the doctrine as a whole, such as it is, is part of the larger rational enterprise that is the law. In Atyah’s words: “Doubtless the law is sometimes irrational, but to treat a whole doctrine of the law as irrational implies both an extraordinary lack of faith in the intelligence of former judges, and an astonishing perversity in the erection of a system of precedent which requires that their decisions should be followed.” With consideration, the reason in question concerns not merely or primarily the motivation to enforce a promise, for consideration “really was and is a recognition of an obligation.” I suspect anyone tempted to make a wholesale characterization of the English system as somehow disease ridden in one way or another possesses a poor understanding of the history and nature of English law and could benefit from reading Atiyah’s chapter on consideration (and indeed the entire book).

[1] Here’s a few (thus not all) of the inaccurate propositions (I’ve selected the ones most germane to our discussion):

· A promise is not enforceable (if not under seal), unless the promisor obtains some benefit or the promise incurs some detriment in return for the promise. (A subsidiary proposition is sometimes included here that consideration must be of economic value.)
· The law of contract only enforces bargains; the consideration must, in short be (and perhaps even be regarded by the parties as) the ‘price’ of the promise.
· Consideration must move from the promisee.
· And thought to follow from several previous propositions: The law does not enforce gratuitous promises.

[2] One of the best accounts of the doctrine of precedent is Neil Duxbury’s The Nature and Authority of Precedent (2008). A somewhat more skeptical take, although not denying the significance of precedent as such, is found in E.W. Thomas’s The Judicial Process: Realism, Pragmatism, Practical Reasoning and Principles (2005).

(8) Patrick S. O'Donnell - August 2, 2012 at 10:34 am

Having clicked on Ken’s name and being led to a website: Koncision: Contract Automation, I think I have a better understanding of why he views English (contract) law the way he does!

(9) Dave Hoffman (August 2, 2012)

Patrick,

I’m confused. We’re not talking about nominal consideration as it is understood in the (sensible) American uniform written obligations act sense – i.e., “for consideration hereby recited.” Rather, we’re talking about the requirement of an actual 1 pound note. Why would that be the rule? It’s not obvious that ordinary individuals would understand this requirement, so it simply adds costs (the requirement to have a lawyer who knows the rule) to contracting. I don’t approach the question of consideration at quite the abstract level your comment does. There are several actual approaches at hand – substantive exchange required, a nominal but real amount of “money” exchanged, and simple recitals. What’s good about the UK’s approach?

(10) Patrick S. O'Donnell (August 2, 2012)

While I can’t promise to dispel your confusion, I think it does in fact reflect the intention of the parties to be bound by the contract (and thus gives rise to an obligation) as something other or more than merely a gratuitous promise without legal effect. I think the 1 pound note does in fact serve as nominal and therefore binding consideration and the determination of “sham” or “false” consideration, which is of course in large measure case sensitive or specific, would have somehow to be a false, inaccurate or misleading representation of what the parties intended by their promises and acts. When I explained this to my wife (a legal layperson in the most robust sense), she said she’s heard of similar cases and it made “perfect sense” as to why they would do this. I suspect the note is a symbolic gesture toward acknowledgment of the use of “real money” on occasion, reminding us that the “real money” involved can be of little or virtually no significant monetary value in some cases of consideration. (It need not have been the note, it might have been any number of things). The UK approach has worked, and continues to work, for them. I doubt there was any significant added cost to the lawyers involved in this transaction above their standard fees for such things. We shouldn’t make a fetish of rules, legal or otherwise (and they hardly mimic algorithms in any case). Perhaps it would help if you had a taste for the abstract level of Atiyah’s analysis, which makes the actual manner of the law’s operation, how the law works in the English legal system, perfectly coherent and comprehensible, if not rationally sensible. Of course Americans are free to do things how they see fit.

(11) Patrick S. O'Donnell (August 2, 2012)

Given the very limited (and non-certified) scope of my knowledge of contract law, I’ve probably exhausted the extent of my contribution to the discussion, which of course may not suffice to persuade those already dispositionally skeptical of the English approach to such matters nor necessarily convince those far more confident of their knowledge of contract law. All the same, JM Sanderson (above) led me to believe (perhaps mistakenly) that my intuitions and thoughts here were not far off the mark.

(12) Patrick S. O'Donnell (August 2, 2012)

A brief addendum: In short, “Does anyone think that that pound of consideration actually motivated McCartney’s promise to perform?” is an irrelevant question, given the role of consideration in English contract law, where a sufficient reason might be one true to the manifest intentions of the parties to contract. The bargained-for-exchange model is not applicable insofar as “courts often enforce promises which are which are not bargains, and…they do so for reasons of justice and good policy.” A classical model or theory of contract law reduced to formulaic propositions fails to capture the numerous exceptions or untypical and marginal cases. Moreover, material factors like benefit, detriment, and bargain are of instrumental value, subordinate to the larger purposes “of determining whether it is just or desirable to enforce a promise; and this necessarily involves the recognition that these are not the only factors to which attention must be, and is in practice paid by the courts.” [emphasis added to the last quote from Atiyah]

(13) Zev (August 3, 2012)

Dave asked: “Does anyone think that that pound of consideration actually motivated McCartney’s promise to perform?” I submit that it did in the same way that a red light at 3:00 keeps cars from going through an intersection in the middle of Nebraska. I think that the formal token of quid-pro-quo “thing of value” transference didn’t motivate McCartney in the sense of the question, “how much money would it take to get him to play any gig?” but it did in the sense of motivating him to be bound by terms of the agreement that go beyond the primary part of the exchange: (primary exchange: playing a gig in exchange for good will/publicity; secondary exchange: 1 pound in exchange for being bound by the Olympic terms). This is very similar to form contracts, which have both primary and secondary components of exchange. For instance, by analogy, the primary exchange when one downloads an .mp3 from iTunes is $1 for the right to play the music on a device. But the secondary component of the exchange involves agreeing to a host of terms in Apple’s EULA and related contracts. If one did the math on the valuation of these extra terms to the individual, one would probably be in the same situation as the fake consideration with McCartney. The 1 pound motivates only to the extent that it is perceived as a formal binding to the secondary terms of the deal.

(14) JM Sanderson (August 3, 2012)

To sum this discussion up, what this essentially comes down to is whether we want to enforce bargains or promises. If it’s the former, nominal consideration and contracts under seal should not be treated as proper contracts. If it’s the latter, initially one might think that any promise with the intention to create legal relations ought to count – but in reality, that leads to litigation costs when A claims B meant to be bound and B claims he didn’t mean to be bound. So we come up with special rules where intent to be bound is presumed (not necessarily conclusively – for example, a contract stated to be binding in honor only, or an intra-family agreement where we don’t want lightly to assume the parties wanted to able to sue). Consideration is one such rule. Seals are, in most Commonwealth jurisdictions at least, another. Notarization is another, in some jurisdictions and for some contracts. In Roman law, the stipulatio (‘spondesne?’ ‘spondeo?’) embodied a similar rule, particularly in Classical times when there was a closed list of words that could be used. In many legal systems, writing creates such a presumption of binding; indeed, the English Law Commission and various academics have from time to time proposed replacing or supplementing the seal rule with a writing rule. For that matter, it would serve many of the same purposes if courts established a rule that shaking hands in a special way made a contract binding, or rubbing noses, or spinning around counter-clockwise three times and saying “potato.”

Personally, I think the promise theory wins by a mile, at least descriptively, in almost every jurisdiction. In Common Law countries, we like to pretend we don’t enforce gratuitous promises, but we do: there are the various forms of estoppel, and what is a declaration of trust if not a gratuitous promise attaching to a specific res? Most Commonwealth countries – I haven’t studied this issue in US law – allow oral declarations of trust over chattels, and the trust can be bare, meaning the only differences from a contract are that a trust needs subject-matter (but it can be a chose in action), and some judges may be a little more skeptical of whether a gratuitous promise was actually intended to be enforced.

Consideration is a doctrine which probably arose because Medieval and Early Modern English law had negated the usefulness of the action of covenant by requiring specialty, and had essentially eliminated the local courts which had simpler customary requirements to make an agreement binding. That meant that people trying to twist the law to find a way to enforce parol contracts, so they used the tort-like action on the case to create the action of assumpsit, requiring false allegations of deceit and loss. The deceit allegation became pro forma; the loss allegation became the consideration requirement, rationalized as bargain theory.

Anyway, go to your favorite law library and find Fuller’s article, and eat a few peppercorns.

(15) JM Sanderson (August 3, 2012)

Also, by saying that nominal consideration should be accepted, I obviously do not mean that it should be sufficient in all cases. Outside commercial dealings, issues like fraud, duress, or unconscionability will often mean that a grossly unequal contract will be unenforceable – for example, where a lender extorts a promise to pay more money by means of a threat to foreclose despite payment of the money that is actually due, or where a consumer is tricked into signing a contract that allows the commercial party to escape all its obligations. Similarly, where the intent is to make a gift, public policy reasons might favor making such contracts revocable by the donor (if only to avoid the predictable litigation about elderly donors’ capacity). Where sham consideration is used to disguise bribes, that’s unenforceable for illegality anyway.

What I am saying is that, where there is a commercial relationship in which transactions are flying around in all directions, it is commercially unrealistic to pick through them and say that one was gratuitous but another was bargained for. If the parties want to make their arrangements binding, they ought to be able to do so through a simple process like nominal consideration. [emphasis added] If an event organizer wants to be sure its singer won’t pull out, and the singer wants to be sure he can get massive free publicity, why should they have to worry that a court, with unrealistic views of commerce, will overlook the security and publicity motives and declare the consideration a sham? If sophisticated commercial parties want to bind themselves, let them. [emphasis added]

1 Comments:

Well, you learn something every day - it is firstly a shame that such an icon had to be contractually bound to perform at an iconic event as big as the Olympics. Secondly, I hope Sir Paul donated the £1.00 to charity !

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